Level II and the Inside Market

Day traders will live and die by what appears on their level II screen. It is in reality the lifeline of online trading, especially for the day trader. This screen will display the existing quotes and sizes each market maker in a particular stock is willing to buy or sell. The key to being a successful day trader is to learn to use the level II and the electronic direct access trading system known as E-DAT; which basically is the method of online trading tying you to others who will buy and sell securities.For each security on your level II screen the online trader will see two sections, on the left side you will see the various market makers and their bid, listed in descending order from the highest bid to the lowest. On the right side you will see the market makers that are willing to sell a particular security, and their asking prices or offers. These are listed in ascending order with the lowest offer on top. Every market maker will also display the number of shares that the market maker is willing to buy or sell at that particular price. The high bid and the low offer are referred to as the inside market. If you are trading in a group it is easier to identify which market maker is a real player in a stock by seeing which one is consistently going high bid to accumulate shares or going low offer to liquidate. By recognizingwho is the “AXE”, a term to describe the major market maker in a stock, makes online trading a bit easier as you can follow on the coat tails of this market maker for bit, however many MM’s may use a fake out technique to disguise their true direction, but we can discuss this in future posts. Are We Having Fun Yet!

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Noah Hochman

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Some fellow traders have stated that with decimalization, paying attention to the inside market and who is the ax in a stock is not as important as it was when stocks traded in fractions, however I feel anything that gives you a better feel for the market, or connects you in some way as to feel moves coming is a valuable tool. I also feel that with thinly traded stocks it is also very important as it gives you a good feel to buy and sell within the spread, if that spread is sufficiently wide. Yes, the spreads are much smaller with decimalization but saving pennies evenually translates into dollars, and for grinders such as myself, can make all the difference.